Geithner Defends Big AIG Payouts

Treasury Secretary Timothy Geithner prepares to testify before the House Oversight and Government Reform Committee on the AIG bailout.
Reuters

By

Serena Ng and

Michael R. Crittenden

Updated Jan. 27, 2010 12:01 a.m. ET

WASHINGTON—Treasury Secretary Timothy Geithner batted back an assault from U.S. lawmakers Wednesday over the bailout of
American International Group
Inc.,
saying he took "full responsibility, and great pride" in his decisions, including a controversial one to pay banks in full on contracts they had with the insurer.

In the widely anticipated House hearing, members of both parties lambasted Mr. Geithner and his former employer, the Federal Reserve Bank of New York, for giving banks a "piggybank full of taxpayer dollars" and then adopting an "absolute code of silence" in resisting disclosure of the transactions.

Mr. Geithner repeatedly characterized the government's choices in the giant insurer's rescue as "tragic" and "terrible." But he maintained that the November 2008 decision to pay off banks in full to tear up $62 billion in contracts that were causing AIG to bleed cash was the right one. Had AIG defaulted on the contracts, its credit would have been downgraded by rating firms and it would have gone into bankruptcy, unleashing mayhem on Wall Street and Main Street, he said.

Mr. Geithner said he wasn't involved in widely criticized New York Fed decisions in late 2008 and early 2009 to limit disclosure about the payouts, including banks' names and the amounts they received.

The hearing comes as Mr. Geithner struggles to move past a rehashing of his role during the financial crisis in order to shepherd through Congress a top Obama administration priority—overhauling financial-industry regulation.

On Wednesday, he implored lawmakers to support the president's efforts to reform the financial system and said a recently proposed financial-crisis-responsibility fee on firms would help taxpayers recoup "every penny" used in the rescue efforts.

"If you are outraged by AIG—and you should be—then you should be deeply committed to financial reform that will protect taxpayers and the economy from excessive risk taking by financial institutions," he said.

Mr. Geithner has become a target on Capitol Hill for members whose constituents still suffer from grim economic conditions. But he has increasingly been able to shed the unease that marked his initial appearances before Congress, as evidenced by Wednesday's aggressive give-and-take with lawmakers.

He responded to the congressional grilling with determined answers, even as several lawmakers heaped criticism on the New York Fed's motives and Republican Rep. John Mica of Florida called for his resignation. The Treasury secretary, at times interrupting congressmen, stated he would stay in his job as long as President Obama wanted him there.

U.S. Treasury Secretary Timothy Geithner defends the bailout of AIG in a hearing on Jan. 27, 2010. Video courtesy of Fox News.

Some weren't persuaded. Democratic Rep. Stephen Lynch of Massachusetts questioned Mr. Geithner's insistence that the Fed had no leverage to demand that banks accept less than the full value of their contracts. In the depths of the crisis, Mr. Lynch said, "we were changing the rules and regulations every single day." This "was a terrible decision on your part."

Neil Barofsky, the special inspector general for the Treasury's bailout program, which contributed funds to help prop up AIG, echoed that sentiment. He testified that the New York Fed's negotiations with banks on the payouts were conducted over the phone by "midlevel executives," and AIG's trading partners were told negotiations were voluntary.

"Would it have made a difference if [Messrs. Paulson and Geithner] talked to the CEOs [of the banks]?" he asked. "We'll never know because the effort was simply not taken."

Mr. Barofsky added that after November 2009, when his office published an audit of AIG's bank payments, he learned that French bank regulators—which regulated two banks holding AIG contracts—"would have been willing to engage in discussions so long as it was very high-level," transparent and universal, with other banks agreeing.

His office is opening an investigation into the Fed's cooperation and disclosures during the audit last year. Mr. Barofsky said he was "extremely surprised" not to have seen some documents that turned up in 250,000 pages submitted by the New York Fed to the House committee.

Thomas Baxter, the New York Fed's general counsel, said allegations that the Fed was trying to "cover up" a so-called back-door bailout of the banks weren't true.

Former Treasury Secretary Henry Paulson also testified, saying the intervention was necessary to save the giant insurer, but he wasn't happy about it.

"Taxpayer money should not have been spent to save a mismanaged and misguided enterprise," Mr. Paulson said. But "AIG could not have been effectively wound down … the only option was bankruptcy." That, he added, "would have buckled our financial system and wrought economic havoc." Unemployment, he estimated, could have risen to 25%.

Mr. Paulson said that he knew nothing about the decision to pay
Goldman Sachs Group
Inc.,
a company he once headed, or other banks the full face value of their contracts with AIG, although he was Treasury secretary at the time.

"This was a Federal Reserve loan," he said. "They had the authority. They had the technical expertise … and I was working on many other things which were in my bailiwick."

Mr. Paulson took the witness stand after Mr. Geithner, with the two shaking hands as one left the room and the other entered. "Welcome back, Mr. Paulson, you really miss Washington, I assume," quipped Rep. Paul Kanjorski (D, Pa.).

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